International finance || ๐Ÿ’€๐Ÿ’€

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Finance

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95 Terms

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the study of international finance

the study that is concerned with economic interactions between countries and their influencers on conporations

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foregin exchange (fx) market

a 24h, otc, largely inter-bank market, where London is the largest centre

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inter-bank market

trading occurs largely between banks

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over-the-counter market

brokers and dealers negotiate directly with one another over telecomunication networks, there is no centralized exchange

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sell side

generally consists of large FX trading banks and other liquidity providers

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buy side

consists of clients who use these banks and other liquidity providers to undertake FX transactions

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main participants of the fx market

corporate accounts, real money accounts, levraged accounts, retail accounts, governments, central banks, sovereign wealth funds

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corporate accounts

corporations of all sizes undertake FX transactions during cross-border purchases and sales of goods and services

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real money accounts

investment funds managed by institutional investors such as: insurance companies, mutual funds, pension funds, endowments, exchange-traded funds

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leveraged accounts

the professional trading community consisting of: hedge funds, proprietary trading shops, commodity trading advisers, high-frequency algorithmic traders, proprietary trading desks at banks, FX brokers

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retail accounts

individuals trading for their own accounts as well as smaller hedge funds and other active traders

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governments

all of them have FX needs: maintaining consulates in foregin countries and overseas military bases

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central banks

they intervene in FX markets in order to influence either the level or trend in the domestic exchange rate

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sovereign wealth funds (SWFs)

many countries with large current account surpluses have diverted some of the resultant international capital flows into them

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trading motives and strategies

speculation, hedging, arbitrage

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reporting dealers

bank dealers and others providing liquidity and warehousing risk for the rest of the market

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non-financial customers

primarily corporations using the FX market to support their core business activities, especially international trade

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other financial institutions

traditionally the financial customers of reporting dealers

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iso currency codes

a list of three letter currency codes, they are typically composed of a countryโ€™s two-character internet country code plus a third character denoting the currency unit

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spot transactions

transactions that require almost immediate delivery

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forward transactions

transactions require future delivery

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value date

the date of settlement of a transaction

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outright forward

transaction that requires delivery at a future date of a specified amount of one currency for a specified amount of another currency

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swap transaction

is the simultaneous purchase and sale of a give amount of foregin exchange where the buying and selling are separated in time

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direct quote

1 unit of foregin currency = n units of domestic currency

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indirect quote

1 unit of domestic currency = n units of foregin currency

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cross rate

an exchange rate between two currencies, calculated from their common relationships with a third currency

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discount

when a currency is less valuable in the forward market than in the spot market

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premium

when a currency is more valuable in the forward market than in the spot market

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outright forward quotation

the spot quotation from which we must substract premiums or add discounts

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currency arbitrage

the act of buying and selling currencies instantaneously for a riskless profit

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eurocurrency

is any freely convertible currency deposited in a bank outside of its country of origin

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eurocredits

bank loans denoted in eurocurrencies

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factors of currency valuation

  1. monetary and fiscal policy, which can affect interest rates

  2. inflation

  3. central bank intervention

  4. politics

  5. market psychology

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the law of one price

identical goods or financial assets traded in two markets must have the same price in both markets

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parity relationships

the exchange rate between two currencies of two countries purchase power

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interest rate parity

links interest rates and forward exchange rates

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purchasing power parity

links spot exchange rates and inflation rates

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fisher effect

links inflation rates and interest rates

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international fisher effect

links spot exchange rates and interest rates

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expectations theory

links forward rates and expected spot exchange rates

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covered interest arbitrage

is an arbitrage trading strategy whereby an investor capitalizes on the interest rate differencial between two countries by using a forward contract to cover exchange rate risk

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the big mac index

is based on ppp, it compares the price of the burger in the US and abroad signaling whether a currency is under- or overvalues

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transaction exposure

comes from cash flows that arise from payments and receivables in foreign currencies

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translation exposure

in an accounting exposure associated with the restatement of foreign currency denominated financial statements

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economic exposure

comes from the changes in cash flows caused by an unexpected change in exchange rates

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natural hedge

a strategy that reduces financial risks in the normal operation of an institution

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internal exposure management

  1. balance sheet hedge

  2. leading and lagging

  3. netting

  4. matching

  5. pricing policies

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external exposure management

  1. forward market hedge

  2. money market hedge

  3. derivatives

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forward market hedge

offset a foreign currency receivable with a forward contract to sell that currency or offset a payable with a forward contract to buy that currency

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money market hedge

offset a foreign currency receivable by borrowing in the same currency

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currency futures

an exchange-traded futures contract that specify the price in one currency at which another currency can be bought or sold at a future date

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currency options

gives the buyer the right, but not the obligation, to buy or sell a given amount of one currency for another at a fixed exchange rate

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balance sheet hedge

involves structuring a balance sheet such that exchange rate changes affect assets and liabilities in tandem

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leading and lagging

involves either acceleration or deceleration in the timing of the payment of a foreign currency or the timing of the receipt

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netting

reduction of the amount of intercompany receipts and payments that flow through the foreign exchange market

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matching

matching the foreign currency cash inflows and outflows with respect to both volume and timing

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pricing policies

the tactic of altering the foreign currency price in response to exchange rate changes

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exchange rate regimes

refers to the policy framework adopted by a countryโ€™s central bank to manage its currency

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fiat currency

is physical money backed by national governments

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cryptocurrency

is a medium of exchange created and stored electronically used cryptographic techniques

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stablecoins

are new forms of cryptocurrencies which get their stable value by being backed by stores of central bank money and government securities

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central bank digital currencies

are digital forms of central bank money for retail payments being explored by central banks

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dollarization

a country uses the currency of another nation as its medium of exchange and unit of account (not just the US dollar)

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seigniorage

the difference between the face value of money and the cost of producing it

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currency board

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economic and monetary union

a zone where a single monetary policy prevails and inside which a single currency, or currencies which are perfect substitutes, circulate freely

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gross domestic product

is the value of all the final goods and services produced within a nationโ€™s borders

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gross national product

is the value of all the final goods and services produced by nationโ€™s citizens

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terms of trade

the ratio of the price of exports to the price of imports

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autarky

when a country does not trade with other countries

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open economy

when a country trades with other countries

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absolute advantage

when a country can produce a good at a lower cost, or use fewer resources in its production than its trading partner

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comparative advantage

when the opportunity cost of producing a good is lower than of its trading partners

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tariffs

taxes that the government levies on imported goods

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quotas

restrict the quantity of a good that can be imported into a country

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voluntary export restraint

is a trade barrier under which an exporting country agrees to limit its exports of a good to its trading partners

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regional trading block

a group of countries that have signed an agreement to reduce and progressively eliminate barriers to trade

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free trade area

all bariers to the flow of goods and services among members are eliminated

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customs union

extends fta by not only allowing free movement of goods and services but also creating a common trade plicy

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common market

incorporates all aspects of customs union and extends it by allowing free movement of factors of production among members

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balance of payments

a double-entry bookkeeping system that summarizes a countryโ€™s economic transactios with the rest of the world for a particular period of time

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current account

measures the flow of goods and services

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capital account

measures transfers of capital

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financial account

records investment flows

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elasticities approach

focuses on the expenditure-switching effect of changes in the relative prices of imports and exports

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absorption approach

focuses on aggregate expenditure and saving decisions